BUSINESS CHAPTER 19

Question 1

What are security markets

Answer 1

financial marketplaces for stocks and bonds. they serve 2 primary functions

Question 2

What are the 2 primary functions of security markets

Answer 2

-assist businesses in finding long-term funding to finance capital needs
-provide investors a place to buy and sell securities such as stocks and bonds

Question 3

primary markets

Answer 3

handle the sale of new securities

Question 4

secondary markets

Answer 4

handle the trading of securities between investors, with the proceeds of the sale going to the seller

Question 5

initial public offering (IPO)

Answer 5

the first public offering of a corporation’s stock

Question 6

investment bankers

Answer 6

specialists who assist in the issue and sale of new securities

Question 7

institutional investors

Answer 7

large organizations, such as pension funds or mutual funds, that invest their own funds or the funds of others

Question 8

stock exchange

Answer 8

an organization whose members can buy and sell (exchange) securities for companies and investors

Question 9

over-the-counter (OTC) market

Answer 9

exchange that provides a means to trade stocks not listed on the national exchanges

Question 10

NASDAQ

Answer 10

a nationwide electronic system that communicates over-the-counter trades to brokers

Question 11

Securities and Exchange Commission (SEC)

Answer 11

Federal agency that has
responsibility for regulating the various exchanges

Question 12

Prospectus

Answer 12

A condensed version of economic and financial information that a
company must file with the SEC before issuing stock; the prospectus must be sent to prospective investors

Question 13

Stocks

Answer 13

Shares of ownership in a company.

Question 14

Stock certificate

Answer 14

Evidence of stock ownership that specifies the name of the company, the number of shares it represents, and the type of stock being issued.

Question 15

Dividends

Answer 15

Part of a firm’s profits that the firm may distribute to stockholders as either cash
payments or additional shares of stock.

Question 16

advantages of issuing stock

Answer 16

-Stockholders are owners of a firm and never have to be repaid their investment
-there is no legal obligation to pay dividends
-issuing stock can improve a firm’s balance sheet since stock creates no debt.

Question 17

Disadvantages of Issuing Stock

Answer 17

-Stockholders have the right to vote for a company’s board of directors. Issuing new
shares of stock can thus alter the control of the firm.
-Dividends are paid from after-tax profits and are not tax-deductible.
-The need to keep stockholders happy can affect managers’ decisions.

Question 18

Common stock

Answer 18

The most basic form of ownership in a firm; it confers voting
rights and the right to share in the firm’s profits through dividends

Question 19

preferred stock

Answer 19

Stock that gives its owners preference in the payment of dividends and an earlier claim on assets than common stockholders.

Question 20

Preferred stock can also be

Answer 20

-callable
-convertible
-cumulative

Question 21

Bond

Answer 21

A corporate certificate indicating that a person has lent money to a firm

Question 22

Principal

Answer 22

The face value of the bond

Question 23

Maturity date

Answer 23

The exact date the issuer of a bond must pay the principal to the
bondholder

Question 24

interest

Answer 24

The payment the issuer makes to the bondholders for use of the
borrowed money

Question 25

advantages of issue bonding

Answer 25

bondholders are creditors, not owners, of the firms and cannot vote on corporate matters
-bond interest is tax-deductible
-bonds are a temporary source of funding and are eventually repaid
-bonds can be repaid before the maturity date if they are callable

Question 26

disadvantages of issuing bonds

Answer 26

-bonds increase debt and can affect the market’s perception of the firm
-paying interest on bonds i a legal obligation. if interest is not paid, bondholders can take legal action
-The face value of the bond must be repaid on the maturity date.

Question 27

Unsecured bonds (debenture bonds

Answer 27

are not backed by specific collateral.

Question 28

Sinking fund

Answer 28

Reserve account in which the issuer periodically retires some part
of the bond principal prior to maturity so that enough capital will be accumulated
by the maturity date.

Question 29

Callable bonds

Answer 29

permit bond issuers to pay off the principal before the maturity
date.

Question 30

Convertible bonds

Answer 30

allow bondholders to convert their bonds into shares of common stock

Question 31

Stockbroker

Answer 31

A registered representative who works as a market intermediary to buy and sell securities for clients.

Question 32

consider these five criteria when selecting investment options

Answer 32

-investment risk
-yield
-duration
-liquidity
-tax consequences

Question 33

Diversification

Answer 33

Buying several different investment alternatives to spread the risk of investing

Question 34

if diversifying, an investor may put

Answer 34

-25 percent of his or her money into U.S growth stocks
-25 percent in government bonds
-25 percent in divided-paying stocks
-10 percent in a international mutual fund
-the rest in a savings account

Question 35

Bulls

Answer 35

Investors who believe stock prices are going to rise

Question 36

Bears

Answer 36

Investors who expect stock prices to decline

Question 37

Capital gains

Answer 37

The positive difference between purchase price of a stock and its sale price.

Question 38

investors can also choose stocks according to their strategy:

Answer 38

• Blue-chip stocks
• Growth stocks
• Income stocks
• Penny stocks

Question 39

Stock splits

Answer 39

An action by a company that gives stockholders two or more shares of stock for each one they own

Question 40

Buying stock on margin

Answer 40

Purchasing stocks by borrowing some of the purchase cost from the brokerage firm

Question 41

information in a quote includes:

Answer 41

• Highest and lowest price for that day
• High and low over the past 52 weeks
• Dividend paid
• Dividend yield
• Ratios such as price/earnings ratio
• Earnings per share
• Number of shares traded

Question 42

Junk bonds

Answer 42

High-risk, high-interest bonds

Question 43

Mutual fund

Answer 43

An organization that buys stocks and bonds and then sells shares in those
securities to the public

Question 44

Exchange-traded funds (ETFs)

Answer 44

Collections of stocks that are traded on exchanges but are traded more like individual stocks than like mutual funds

Question 45

Dow Jones Industrial Average (the Dow)

Answer 45

The average cost of 30 selected industrial stocks,
used to give an indication of the direction of the stock market over time

Question 46

Program trading

Answer 46

Giving instructions to computers to automatically sell if the price of a stock dips to a certain point to avoid potential losses.